China Is Obsessed With Japanese Anime, And Investors Are Paying Attention

For years watching anime online has been the favorite pastime of Rae Yang, who works at a state-owned Chinese bank in downtown Beijing. The 27-year-old Yang says she spends hours every day on popular Japanese manga such as Gangsta and Gin Tama, so she can immerse herself in a virtual world free from the trivial matters at her workplace.

Now 200 million consumers like Yang are fueling the rise of a youth entertainment market that has come to be known as er ci yuan, which loosely translates as a two-dimensional space. The term is reserved for the online world of anime, comics, games and novel (ACGN) based on imported Japanese titles – the attraction is so deep that the market has reached 250 billion yuan ($38 billion) this year, according to CITIC Securities, which estimates that it can double to 500 billion yuan in a few years as more young consumers opt for the virtual getaways.

“The Japanese anime are different from cartoons for kids,” Yang says. “They are based on real lives but produced in a very interesting way.”

Cosplay fans were getting ready for the opening day of the 9th China International Comics Games Expo (CCG Expo) in Shanghai on July 11, 2013. (PETER PARKS/AFP/Getty Images)

The popularity has gained the attention of investors including Chinese web giants Alibaba and Tencent, who have put billions of dollars in anime-streaming websites and domestic art studios. The companies are betting that consumers will be willing to pay higher subscription fees online, and domestic anime brands will eventually catch up with Japanese manga in plot and art quality. They are also adapting anime and comics into movies and television series to generate sales from advertising, tickets and peripheral products.

“ACGN is a youth sub culture, but I think it can become mainstream in five years,” says Chen Yuetian, an investment director at Beijing-based venture capital Sinovation Fund who has invested in Shanghai-based studio Haoliner Animation. “The big companies need to keep pace, otherwise they will end up making the wrong products.”

Anime site AcFun, for example, raised $50 million in an August funding round led by Alibaba’s video-streaming site Youku Tudou. One month later, Shenzhen-listed Alpha Animation bought Chinese anime site You yaoqi for 900 million yuan ($137 million). In November, Tencent put 200 million yuan ($30.5 million) for a 15% stake in video-sharing site Bilibili, which is now partnering with the company to make 20 domestic anime series over the next two years.

But most of the investments are money-losing, according to Huang Guofeng, an analyst at Beijing-based consultancy Analysys International. Whatever subscription fees the sites currently generate isn’t enough to cover their operating costs, and China’s anime fans are yet to take a liking to local screen adaptations. The Legend of Qin, a 2014 film based on a namesake domestic series, generated 60 million yuan ($9.1 million) in ticket sales but that is not enough to cover its 100 million yuan ($15.2 million) in production costs. A television series that aired this year has a rating of 4.6 out of 10 on Chinese review website Douban, as people criticize it for cheap special effects and plot that strayed from the original story.

“Although there are not good business models at the moment, the companies are still willing to invest because the market is at its infancy,” Huang says. “Prices are cheap. If you get in now, you may have an advantage later.”

Sinovation Fund’s Chen says money can be made from future games and e-commerce offshoots. “It is hard for the production and the distribution process to be profitable,” he says. “But there will be opportunities in game adaptations and sales of peripheral products if an anime can gather enough fans.”